Don't let this cat cross your path

Stupid investment of the week: Vaso Active

Corrects information about private investment in the company that was withdrawn.

BOSTON (CBS.MW) -- Professional investors have a lot of cool terms to explain what they are looking at.

Few attract as much attention as the "dead-cat bounce."

Simply put, a dead-cat bounce is what happens when a stock takes a huge tumble, after which it has a little bit of an uptick. It gets its name from the horribly gross idea that even a dead cat, when dropped from a high place, will bounce.

But just as that thought is not for the squeamish, a stock in the throes of a free-fall -- but possibly headed for a bounce -- is not for the average investor.

And that's why Vaso Active Pharmaceuticals
VAPH
a classic dead-cat stock searching for a bounce, is today's pick for Stupid Investment of the Week. In just a few weeks, the Danvers, Mass-based pharmaceuticals company had its trading suspended for two weeks by the Securities and Exchange Commission, was delisted by the Nasdaq Stock Market and learned that it is the subject of a Food and Drug Administration investigation.

Its supporters suggest that things have gotten as bad as they could be.

But Stupid Investment of the Week is designed to highlight the problem traits and flawed thinking that make a security less-than-ideal for the average investor. Virtually any stock with as many troubling conditions as VAPH quickly becomes the domain of traders and short sellers, which makes it rough ground for average investors.

While obviously not a buy signal, neither is SIOTW an automatic sell signal, as there may be times when dumping a problem security merely compounds the problem. With Vaso Active, however, that's probably not the case. Investors who bought shares of last December's initial public offering at about $5 per share -- or who bought when the stock peaked in the $35 range (before a three-for-one split) -- are looking at massive losses if they held on.

Today, with the stock trading at less than a dollar per share, some investors look at the history, as well as the potential that drove the stock skyward, and expect a rebound.

It may happen, but that does not make this a pool that average investors want to swim in just yet.

For starters, VAPH is just a week off of its trading suspension. On April 1, the Securities and Exchange Commission announced a two-week suspension of the stock "because of questions regarding the accuracy of assertions by VAPH and others" about FDA approval of some key products, as well as assertions made by the company in its reports and financial statements. The stock began trading again after the suspension ended April 15.

The company agreed to stop selling its products, including an athlete's foot treatment called Termin8, until the FDA concerns are resolved.

During the suspension period, Vaso got a letter from the Listing Investigations section of the Nasdaq, warning of an open inquiry into whether the company was continuing to meet listing requirements.

Management voluntarily removed the stock from the Nasdaq in order to focus on its other issues. It was removed from the exchange midway through its trading suspension, so that it now trades on pink sheets.

Pink Sheets is a centralized quotation service for stocks in the over-the-counter market. While there are many fine companies traded on Pink Sheets or the OTC Bulletin Board, these are not the trading domains commonly frequented by average investors, as information flow on these issues frequently is more sparse than on the bigger boards.

Not surprisingly, the problems made the stock crater. VAPH traded for nearly $8 per share when trading was halted. Upon reopening, it became a penny stock within days, closing under a dollar per share.

That's the dead-cat drop.

The bounce is what investors who buy in now are hoping for.

The problem with the bounce is that short sellers are looking to cover their positions and lock in their profits. So it's not necessarily a rebound to a proper value point. It can be short-lived -- it's a bounce, not a rebound -- and timing can be critical.

That, too, makes it dangerous water for average investors.

With some of its numbers and potential being questioned by regulators, Vaso investors have to be a bit perplexed when looking at financial statements, wondering just how much of the information they can trust.

And when they look at news on the company, most of what they will see is alerts about class-action lawsuits filed against the stock, rather than explanations and clarifications from management. Vaso officials did not return calls placed to them last week.

Even the company's one bit of good news -- a private placement management was able to land as the price was falling back off its high -- soured when the hedge fund involved was able to back out of the deal.

"You look at a stock like this and you like the story about what they are developing," says Warren Isabelle, manager of the ICM/Isabelle Small-Cap Value Fund. "You're hoping that the right things can happen, so that the stock returns to the kind of path it was on.

"But when you are looking at a company and everything seems to have gone wrong all at once, that's not a stock you want to take a chance with. You might be hoping for a rebound, but you have no real reason to expect one. It might be trading for next-to-nothing, but it gives you about the same chance as a lottery ticket."

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